Drafting Enforceable Commercially Reasonable Efforts Clauses in Business Agreements

Description

Parties to a contract can use efforts clauses to qualify one party's obligation to perform an act. Many commercial contracts contain provisions requiring one party to consistently pursue best efforts, commercial best efforts, commercially reasonable efforts, or some other "efforts" qualification. Especially in a difficult economy, these clauses may place burdens on businesses trying to meet contractual obligations.

Both sides of an M&A transaction must use best or commercially reasonable efforts to close a deal. Parties should actively communicate with each other about their operations as closing approaches. If the parties face any circumstances that place the deal in jeopardy, parties should investigate and document the impact of those circumstances on their ability or obligation to close.

Earn-out transactions oblige an acquirer to operate the acquired company consistent with best or commercially reasonable efforts to protect the seller's earn-out rights. Acquirers should explore and document any strategic changes that might trigger a claim under an efforts clause, including those that are industry-wide or market-based.

Licensing and other commercial agreements often require the developing or commercializing party to continue with commercially reasonable or other efforts. Counsel can track recent development and commercialization efforts of similar products to decide whether a party is using reasonable efforts.

Several states with direct ties to major sales and commercial agreements view these obligations differently. Counsel must understand state obligations that may affect a deal. Delaware courts impose a duty on the party subject to the efforts clause to work with its counterparty to resolve problems. New York, Massachusetts, and California courts focus more on the reasonableness of a party's actions, explicitly acknowledging that a party may consider its own interests in complying with efforts duties.

Listen as our expert panel discusses building "best efforts" clauses in future commercial agreements and handling a default if one arises.